According to a recent Wood Mackenzie report1 we could soon face a global shortage of high-quality oil and gas reserves.
Investment in oil and gas has dramatically declined in recent years as the push toward renewables has taken precedence. So, as productivity in traditional oil fields wanes, companies are looking at unconventional sources to discover high-quality reserves. These include shale, deep-water, and Arctic drilling. However, these sources often require higher investment costs and come with greater environmental and technological risks.
The Wood Mackenzie report suggests that companies must prioritize investment in technology and exploration to discover new, high-quality reserves to meet growing demand.
Is the World Running Out of Oil and Gas?
Despite concerns about running out of oil and gas, there are actually more than enough resources to meet our needs over the next few decades. The amount of oil and gas we have discovered and could potentially find is more than twice what we're likely to use until 2050.
Wood Mackenzie estimates over 2 trillion barrels of oil and 1.7 trillion barrels of gas have been discovered or could be found. This is double or triple the amount of oil and gas we expect to use by 2050, even under the most ambitious climate scenarios. And this is before we even consider that we may find more resources in the future.
Therefore, even though oil and gas are limited resources, we have enough to last us for a while, and we can prioritize producing our resources in a more efficient and sustainable way.
However, although there is plenty of oil and gas in the world, much of it is difficult to access and not worth developing. This means that only a small portion of these resources are cost-effective and sustainable to produce.
Even with the most optimistic estimates, we will only be able to meet about half of the demand for oil and gas until 2050. And if we accelerate the transition to cleaner energy sources, we will still need to use some of these harder-to-reach resources.
The industry cannot afford to ignore this issue, as recent gas and oil supply disruptions have shown how important it is to maintain a stable energy supply. This creates a pressing need to prioritize investing in finding and developing low-cost and low-emission resources.
Oil and Gas Investment Continues
As investors, we can rest assured oil and natural gas supply will continue to be important for many years. But oil and gas companies really need to act now to ensure they have enough high-quality resources in the future. There are three main ways to tackle this:
Exploration: revitalizing their portfolio by finding new, modern fields that are easier to extract.
Lowering Emissions: improving the emissions of older facilities using new, cost-effective technologies.
Alternative Energy: Investing in alternative energy sources like biofuels will help reduce the overall demand for oil and gas, but everything has its limitations and challenges.
Even with these solutions, the oil and gas industry faces challenges as it balances environmental, social, and governance (ESG) concerns with the need for a reliable energy supply.
As companies consider their options in the upstream sector (exploring for and producing oil and gas), some may retreat while others double down. Thus, consolidation through M&A activity is highly likely.
A Shrinking Industry
Companies that stay are expected to focus on improving their portfolio quality as resources dwindle, and competition intensifies. However, even with a dwindling pool of assets, the point of maximum profitability is unlikely to accelerate the transition to renewable energy.
A smaller pool of assets may support higher prices but won't significantly reduce oil or gas demand. In fact, it may increase costs and emissions without making the industry much smaller.
Keeping Costs Low & Reducing Emissions
Industry analysts, O&G professionals and governments used to worry about running out of oil. That’s no longer the case as the industry now despairs at having to leave oil in the ground to make the shift to renewable energy.
The discovery of tight oil (a type of oil trapped in shale rock) was previously seen as a solution to peak energy, but it turns out there is less of it than initially thought. There are only enough tight oil reserves to cover about four years of global oil demand.
Today’s big problem is the affordability (keeping costs low) and emissions of known oil and gas resources. So, the industry's biggest challenge going forward will be maintaining profitability while also reducing emissions.
Finding New Fields
Unfortunately, existing oil fields lack enough resources to meet demand through 2050. Currently, there's a big gap between the demand for oil and the supply from known fields alone. Even in the most optimistic energy transition scenario, where demand for oil and gas is much lower, companies face a difficult challenge in planning to meet it.
To do so, the industry will need to rely on a mix of improved recovery from producing fields and developing new fields. However, neither option seems particularly valuable.
Improved recovery from onstream fields is unlikely to cut costs or emissions, as many technologies used for secondary and tertiary recovery are high-cost and high carbon.
Developing new fields is also problematic because much of the discovered undeveloped resource is compromised, with only a small portion being economically viable with low emissions intensity.
Some undeveloped fields could be improved with investment in decarbonization, but many others are unlikely to achieve an advantage due to high costs and emissions. As a result, meeting the demand for oil and gas in the future will be a challenging task for the industry.
Will the Oil Price Soar?
With the industry facing significant challenges ahead and demand for oil and gas expected to rise, the natural question is, what does this mean for the oil price?
When supply is tight, and demand is high, prices are indeed likely to rise. While a reasonably high oil price is good for business, if it gets too high it’s concerning. It is not good for economic stability and could lead to inflation, which can erode the purchasing power of consumers and businesses, as well as increase costs for industries that rely heavily on oil and gas.
In addition, high oil prices can negatively impact the environment, as they may discourage investment in cleaner and more sustainable energy sources.
However, many other factors, such as geopolitical circumstances, economic growth, and technological advancements, also influence gas and oil prices.
Furthermore, if oil prices become unmanageable, governments could potentially step in with subsidies to help stabilize the industry, but that too can create a host of problems.
Are Biofuels the Answer?
The oil and gas industry faces a shortage of economically viable resources with low emissions intensity. Biofuels, such as plant-based diesel and aviation fuels, could potentially provide a solution by emitting significantly less carbon than traditional crude oil-based products. However, the scale of new resources from these sources will not be enough to fully address the shortage.
What is the Future of the Oil and Gas Industry?
The upstream industry is facing challenges due to the depletion of easily accessible resources. In the past, this was solved by exploring for new resources, but exploration investments have decreased, making it harder to find new resources. This means competition for remaining supplies will increase, and companies will struggle to meet cost and emissions targets.
In turn, companies face pressure to invest in new technologies to lower emissions.
However, the impact on demand for oil and gas is not significant, and upstream oil and gas companies can work on reducing demand by investing in low-carbon energies like biofuels.
In the future, there won't be enough high-quality resources for everyone in the oil and gas industry to maintain their current level of cost and emissions performance.
This means that some companies may choose to move towards low-carbon energies while others will continue to focus on the upstream sector. Those that choose to stay will likely have to diversify their strategies and tolerate some disadvantaged production to meet demand.
Unfortunately, there may even be the emergence of 'dirty' oil and gas companies that operate the most disadvantaged assets.
The responsible upstream industry should increase its investment in renewal, decarbonization, and low-carbon alternatives to combat this challenge, as diversified gas and oil companies are likely to sport an advantage.
In addition to exploration and production, many diversified oil and gas companies also have downstream operations that involve refining and marketing petroleum products. These companies that focus on the entire oil and gas value chain face additional challenges in maintaining profitability as oil prices fluctuate and demand for petroleum products changes.
Overall, the ability to identify and extract high-quality reserves is critical to the long-term success of companies in the diversified oil and gas sector.
1. https://www.woodmac.com/horizons/shortage-of-quality-oil-and-gas/
Next Steps: Diversifying Your Investment Portfolio with Oil and Gas Stocks
If you're looking to diversify your investment portfolio, consider exploring the potential of oil and gas stocks. The challenge of finding high-quality oil and gas reserves makes investing in this sector an exciting opportunity. Focusing on exploration and production (E&P) stocks can be particularly rewarding, as they are directly involved in locating and extracting these valuable resources. Furthermore, investing in oil and gas midstream stocks is often attractive to investors seeking steady income streams, as they typically offer higher dividend yields than other sectors.
To help you navigate the world of oil and gas investing, we recommend reading up on the different types of oil wells and some of our investing guides, such as "How to Buy OTC Stocks," "How to Buy TSX Stocks," and "How to Find Investment Opportunities." As a bonus, you may also want to learn about the benefits of investing in gold, another attractive option for diversification.